Two reasons to watch Japan in 2014

Japan's economic success and rising tensions with China make it a country worth watching in 2014.

The liberal economic approach of Japanese Prime Minister Shinzo Abe has been remarkably successful.

By:Tim Armstrong Published on Fri Dec 27 2013

For over two decades, since the bursting of its economic bubble, Japan has been largely assigned to the journalistic scrap heap. There are now two reasons to refocus seriously on Tokyo – one positive and another potentially ominous.

The first is generally referred to as Abenomics, Japan’s version of at least some of Paul Krugman’s support for fiscal stimulation and his critique of the conservative fixation with balanced budgets and public debt.

How successful has this economic approach by Prime Minister Shinzo Abe been? By most measures, quite so. According to Joseph Stiglitz, once chair of the Clinton Administration’s Council of Economic Advisors, three aspects in particular are contributing to Japan’s re-emergence as a growing and prospering economy.

The first, led by the new governor of the Bank of Japan, Haruhiko Kuroda, is the fight against deflation, which was increasing Japan’s debt burden and also its real interest rate. Undeterred by right-wing concerns about rising costs, Kuroda has set an inflation target of 2 per cent. His stance has already lowered the yen’s exchange rate, benefiting Japanese exports on the world market.

Two additional aspects of Abe/Kuroda policies are the continuation – indeed a significant increase – in fiscal stimulus through so-called quantitative easing, including massive infrastructure spending. The second includes a package of policies aimed at improving productivity and increasing labour force participation, with the emphasis on women.

The North American media, consistent with its habit of downplaying Japanese accomplishments, heralds a third-quarter slowdown as evidence that Japan is still mired in the economic mud. But the slower expansion was still better than what most analysts had expected, and the Nikkei index of major stocks still continues its spectacular advance, now having increased by about 60 per cent in the past year.

So much for the good news. A worrisome aspect of the Abe government’s aggressive approach is a noticeable refueling of Japanese nationalism, including a threat to revise its pacifist constitution, imposed by the U.S. in the immediate post-war occupation. This at a time when an economically powerful China, under its undemocratic, state-sponsored capitalism, is also engaging in nationalistic posturing throughout the Asia Pacific region.

As has been widely reported, the current conflict involves the Senkaku Islands (known in China as the Diaoyu Islands) in the East China Sea. While these tiny rocks are uninhabited, they are in an area that is believed to have significant oceanic oil reserves. China recently demanded that planes flying over an extended area that includes the islands identify their flight plans in advance to Chinese authorities. This prompted an angry and defiant reply from Japan.

The historical basis for the dispute is complex. The Chinese claim to have discovered and controlled the islands from the 14th century. Japan acquired them in 1895 and controlled them until the end of the Second World War. The U.S. then administered them from 1945 until 1972, when the islands reverted to Japan under the U.S./Japan Okinawa Reversion Agreement. The situation was made even murkier when Japan, following a temporary landing on the islands by Chinese activists in 2012, subsequently “purchased” three of the five islands from a private “landowner” for two billion yen.

To increase concerns, the U.S. has pledged its support for Japan, based on the 1960 U.S. Treaty of Mutual Cooperation and Security, which grants the U.S. the right to military bases in Japan in exchange for its undertaking “to defend Japan in the event of an attack.” U.S. Secretary of Defense Chuck Hagel, in characterizing China’s purported control over the fly zone as “a destabilizing attempt to alter the status quo,” has affirmed that the U.S. “will remain steadfast to its commitments.” While U.S. domestic airlines have complied with the Chinese directive, the U.S. military continues to fly into the zone without notifying China.

Tensions appeared to ease when Japan asked the UN to declare that China's "air defence zone" action was unjustified. But last week, in approving an expanded 5-year $11.7 billion defence plan - which includes the acquisition of drones and amphibious assault vehicles - Abe cited China's attempt "to alter the status quo by force" as "incompatible with the established international order."

Given the importance of the U.S./China trading relationship, it would seem that there will be heavy pressure to resolve the Senkaku Islands dispute, either through some form of mediation, as proposed by South Korean President Park Geun-hye, or otherwise. Regardless, it’s a conflict worth watching. It’s becoming increasingly apparent that Chinese and Japanese competitive territorial nationalism, largely dormant for decades now, has become dangerously alive in Asia.

Tim Armstrong is a lawyer and former Ontario Agent General for the Asia Pacific Region stationed in Tokyo and a Deputy Minister in the Ontario government.

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